Question

Economics (including finance) is a social science that studies how to allocate scarce resources. Neoclassical economics is a school of economics that has dominated the economic thought since the 20^th century. All the economic and financial theories you have learned so far belong to the neoclassical economics. These theories are based on several fundamental assumptions of human behavior. Can you list at least four of these assumptions and briefly explain them?  

Answer 1

The neoclassical theory basically focuses on the assumption of how the usefulness of products affects forces within the market. The theory states that consumers perceives products not on the basis of their cost, but on the basis of the value they provide and how useful the product is for them. The aim of any firm is profit maximization and of consumer is utility maximization, this is the reason why consumers are in real control of market forces like pricing as well as demand. The four basic assumption of neoclassical theory can be laid down as follows:

• Economic decisions are always taken on a rational basis, which means on the after considering full information as well as usefulness of the product or services: It basically means that a consumer will take decision rationally, based on the information available and usefulness. It is one of the primary assumption of this theory.
• Consumers will eventually compare goods that are available in the market and then will make a purchase of the product which will give best utility
• The main objective of customer is to maximize the utility from the product
• The main aim of companies is to maximize profits: Firms want to maximize profits through less cost of production and higher sales which is only possible through higher demand, thus companies will cater to higher demand.